What happens if you cannot repay your guarantor loan?
If you cannot repay your loan, the idea is that the repayment will be collected from the guarantor’s account. But before the guarantor is out of pocket, the lender will usually get in touch with the borrower to discuss repayment and give you the chance to repay first. We appreciate that one’s circumstances can change and due to an emergency or being paid late from work, you may not be able to keep up with the monthly instalments. However, not understanding the implications of late repayment could lead to a far more expensive loan and a negative impact on your credit score. Below we give a full explanation of the different outcomes if you cannot repay your loan on time and the various outcomes.
On the days leading up to each repayment, the lender will always get in touch directly with the borrower and the guarantor via email and text message reminding them on the days leading up to repayment. This ensures that the borrower has time to get their repayment ready for when the lender automatically collects from their debit account and there are no surprises.
If the customer misses repayment, the lender will get in touch by email and text message to follow up on repayment. If there is no response, the guarantor lender may call the customer directly to get an update and discuss repayment options. A lawyer’s letter may be sent explaining the terms and conditions of the contract but if the borrower fails to respond to these measures, the repayment due will be taken
automatically out of the guarantor’s bank account. It is important that the guarantor and the borrower communicate because the guarantor will be required to cover the cost of repayment.
By missing repayment and failing to respond to the emails and phone calls from the lender, there may be increased charges on your account. This may include a default fee of up to £30 for every missed repayment and daily interest added onto your account. Your loan is based on a daily interest rate so the longer you have your loan open for, the more the daily interest rate accumulates. For instance, if you are 5 days overdue, you will be charged 5 days worth of interest. It is important to be aware of the extra costs that could be added to your account. Failing to repay on time and delaying repayment may significantly increase the cost of your loan.
Arrangement or pay plan
Once contacted by the lender, if you discuss your financial situation, they may be able to offer you an arrangement or pay plan which involves creating a more flexible repayment plan to help you pay off your loan in more frequent instalments at lower amounts. If you cannot repay the full amount due on that date, the idea is that you should be able to repay lower amounts towards clearing the account. A pay plan will not increase the cost of the loan, it will simply increase the duration of the loan e.g instead of repaying £100 at the end of the month, an arrangement will allow you to repay £20 per month for the next 5 months. This type or repayment option is certainly very flexible and helpful to someone struggling to repay. However, a pay plan should not be an ‘easy option’ for failing to repay a loan because a delayed repayment will be noted on your credit file and may negatively affect your credit score.
Impact to your credit score
Failing to repay your loan on time may negatively impact your credit score. Missing repayment will cause the information from the guarantor lender to be sent to a credit reference agency and the defaulted repayment will be noted on your credit file. Once recorded on your credit file, other lenders will be able to see that you missed a repayment when they carry out a credit check on you and they may not decide to lend to you based on this.
By comparison, repaying your loan on time will in fact improve your credit score and make it easier to access other forms of credit and finance in the future. Several applicants who apply for guarantor loans with bad credit use it as a vehicle in order to repay on time and boost their credit score.
What you should do if you cannot make repayment
1. It is absolutely essential to speak to the lender if you know you cannot make repayment. If you know well in advance that you will not make the next instalment, get in touch with the lender and explain your situation. The lender should be able to offer forbearance which means that they will be sensitive to your position and can lower the cost or offer you a pay plan. Avoiding phone calls and emails may cause the lender to add the default fees and daily interest charges that we discussed, so it is essential to respond to all correspondence.
2. Before taking out the loan, you must ask yourself if you really need it. We explain the added costs of not being able to pay and impact to your credit score. You need to decide whether taking out the loan will put you under too much financial pressure. Furthermore, if the guarantor is someone close to you, you don’t want to jeopardise the relationship you have and it may be worth borrowing from them directly.
3. You should not take out more loans to repay your existing loans. This may lead to a spiral of debt and put you in an even worse financial position.
4. If you have any questions about taking out a loan or if you want advice about repaying your loan, visit https://www.moneyadviceservice.org.uk/en